Credit Spread – First Solar (FSLR)

The chart on FSLR shows prime conditions for a credit spread

When you turn on the light switch at home, you probably don’ think about how the power is generated. You just hit the switch and there is light. Here is a trade idea that might make you think about where that energy comes from and at the same time generate some profits for your portfolio.

The trade: Sell the September 34/36 Put Credit Spread (selling the September 36 put and buying the September 34 put) for 35 cents or better.

The strategy: The maximum potential profit for this trade is 35 cents if FSLR is trading above $36 at September expiration. The maximum loss is $1.65 ($2 – 35 cents) if FSLR is trading below $34 at September expiration. Breakeven is $35.65 at expiration based on a credit of 35 cents.

Click to Enlarge The rationale: First Solar just recently announced earnings and the company didn’t fare very well based on the decline of the stock. Although margins matched expectations, earnings per share and revenue did not. The company also lowered its guidance based on these results. The key to success for First Solar going forward is to make solar power a formidable business. The company is already positioned as one of the lowest cost firms in the solar industry (if not the lowest).

What really makes this trade idea worth considering is the chart. The stock gapped down after its earnings announcement and has been hanging around just below a pivot area at $41 which could act as support. What is also interesting is that the stock has potential support at just above $36 from previous pivot levels back in February and April of this year. In addition, the daily 200-simple moving average is also hanging around the $36 pivot level too. The stock has not traded below the moving average once it moved above it back in November 2012. Two strong forms of potential support in the same area which are just above the sold strike makes this trade idea feel like a sunny day!

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